Ex-fund manager Nick Sleep is probably the best stock market investor you’ve never heard of. Between 2001 and 2013, his fund generated returns of 21% a year (18.4% after fees) – roughly three times the market return.
So what did the British investor do differently to other fund managers and investors? And are there any Sleep-type stocks on the London Stock Exchange today?
A simple strategy
Sleep’s investment strategy was very different to that of your average fund manager. But it wasn’t that complicated.
At its core, it revolved around investing in companies (globally) that could compound their growth and get much bigger over time, and holding on to them for the long term. This led to huge returns in stocks such as Amazon, Costco, and Berkshire Hathaway.
Sleep understood compounding
Most investors understand the basics of compounding. But you’d be surprised how many investors (both professional and retail) fail to really apply it in an investing sense. You see, the big money in investing isn’t made by compounding a 5% dividend. Instead, it’s made by investing in companies that can generate an internal return of 10%, 20%, 30%, or more on their capital, reinvest that return and do it again repeatedly.
Sleep would aim to focus on these kinds of businesses. He understood that internal compounding can lead to huge returns over the long run.
Scale economies shared
One business model Sleep was a big fan of was what he called “scale economies shared”. This is where savings are passed on to customers as a company achieves economies of scale. This can lead to a self-fulfilling growth cycle. As a result of the lower prices, the customer purchases more goods, which provides greater scale for the retailer, who can then pass on more savings.
Founder-led companies
It’s worth noting that many of the businesses Sleep invested in were founder-led. He believed that companies with founders in the C-suite were more likely to be good investments.
Valuation
In terms of valuation, originally it was a key area of focus for Sleep. However, over time, he came to realise – as many investors often do – that the quality of the business is a more important driver of long-term returns than the initial valuation, so metrics like the price-to-earnings (P/E) ratio weren’t a major focus for him in the end.
Long-term focus
Finally, Sleep would aim to hold on to businesses for many years. He’d pretty much ignore the macro environment and focus on companies that were steadily compounding.
A Sleep-type stock?
Sleep stopped managing money in 2014. But if he was still running his fund today, one stock I think he might be interested in is money transfer company Wise (LSE: WISE).
Founded in 2011, it has grown much bigger since inception by compounding its returns. For the financial year ended 31 March, revenues are expected to be around £1.6bn – up 430% on the figure five years earlier.
Wise operates a ‘scale economies shared’ model. As it gets bigger, it passes cost savings on to customers in the form of lower fees.
Additionally, it’s founder-led. Currently, Kristo Kaarmann is the CEO.
Now, this stock isn’t perfect. Payments is a competitive space and it’s hard to know how much of a genuine competitive advantage the company has.
Overall though, I think it looks interesting. I believe it’s worth considering today.
